BoI: Without tax hike, state deficit will hit 4.9%
Even with spending cuts set to the legal level, the government will not bring in enough revenue to keep the deficit under the 3% target.
If the government does not cut expenditures to legal levels and raise revenues
by NIS 7.5 billion, the budget deficit will hit 4.9 percent of GDP in 2013,
according to new projections the Bank of Israel released on Wednesday.
setting the 2013 state budget, the next government must adhere to two laws, one
that caps spending growth at 5%, and another that targets the overall budget
deficit, now set at 3%.
According to the projections, spending forecasts
for 2013 are 9% greater than the 2012 budget, and must be cut by NIS 13b. to
keep within the spending guidelines.
That should come as a bit of a
relief for the government; previous projections put the amount at NIS 14b.,
meaning that it now has an extra billion shekels of wiggle room in budget
The relief ends there, however.
Even with spending
cuts set to the legal level, the government will not bring in enough revenue to
keep the deficit under the 3% target.
According to the report, only
lowering expenditures would leave the country with a 3.6% deficit, meaning it
will have to raise more money, either through increasing taxes or slashing
“To meet the deficit target for 2013, NIS 6b. in increased
tax receipts are necessary, which means, taking into account the effect of taxes
on activity, tax rates will have to be increased or tax exemptions reduced by
the equivalent of NIS 7.5b.,” the report said. The NIS 1.5b. gap between the two
figures comes because tax increases would reduce economic
Spending projections for 2014 and 2015 will require even more
cuts down the road to keep within the legal framework, according to the report, requiring NIS 22b. and NIS 27b. in cuts,
Without significant budgetary action, the country’s overall
debt burden will reach nearly 95% of its annual output by the end of the decade.
If the government sticks to its current deficit targets, the debt will fall from
its current 74% of GNP to 65% by 2020.
In its own quiet, technocratic
way, the Bank of Israel report took Prime Minister Binyamin Netanyahu to task
for allowing the 2012 deficit to balloon to 4.2%, more than double the original
“Most of the gap was already identified during 2011, and, at the
end of 2011, the government accordingly increased the forecast deficit to 3.4%
of GDP,” the report said. “However, as it operated within the framework of a
two-year budget, no adjustments were made at that time in order to reduce the
deficit. It was only in the second half of 2012, as the deficit continued to
grow, that the government decided to increase tax rates in order to reduce the
deficit, primarily heading into 2013.”
resulting from lackluster wage growth and new home sales were the culprit behind
most of the 2012 deficit, it concluded.